An Empirical Examination of Call Option Values Implicit in U.S. Corporate Bonds

Abstract

This study examines call option values implicit in U.S. corporate bonds during the period 1973 to 1994. The average call option value is 2.25 percent of par. Over time, call values remain close to zero until one year before the first call date, reach a maximum at the beginning of the callable period, and slowly decrease thereafter. The determinants of call values are examined. The results show that higher coupon bonds issued by firms with an aggressive call behavior have larger call values. The results also show that lower interest rates and higher interest rate volatility lead to higher call values. Call values increase with time to maturity in the callable period but decrease with time to maturity in the call protection period. There is no evidence that the slope of the yield curve or the length of call protection period influences call values.

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